Arq Inc (ARQ) 2011 Q1 法說會逐字稿

Greetings and welcome to the ADA-ES Reports 2011 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce Melissa Dixon of The Equity Group, Investor Relations for ADA-ES. Thank you, Ms. Dixon, you may begin.

Thank you, Diego. Good morning, everyone, and thank you for joining us today. Before we get started, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of Section 21-E of the Securities Exchanges Act of 1934 and 27-A of the Securities Act of 1933, which provides a Safe Harbor for such statements in certain circumstances. These statements are identified by words such as believe, will, hope, expect, anticipate, intend and plans,the negative expressions of these words or words of [more meaning].

Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors, including factors discussed in ADA-ES' filings with the US Securities and Exchange Commission, with particular emphasis on the section entitled Risk Factors in ADA-ES' Forms 10-K and 10-Q. Investors are cautioned not to place undue reliance on the forward-looking statements, and to carefully examine the information ADA-ES discloses publicly in its filings with the Securities and Exchange Commission or otherwise, before deciding to invest in ADA-ES' securities.

The forward-looking statements made during this conference call are presented as of today's date and ADA-ES disclaims any duty to update them, unless required by law to do so. A recording of this call can be found in the investor relations resources of our website, www.adaes.com.

Now, I would like to turn the call over to Mark McKinnies, Chief Financial Officer. Mark, please go ahead.

Thank you, Melissa. And good early morning to everyone and thank you for joining us to the ADA-ES First Quarter 2011 Conference Call. First, I would like to discuss the Company's financial performance and then our President and CEO, Mike Durham, will update you on the Company's recent corporate developments and our future plans. After that, we will open the call for your questions.

Revenues amounted to $8.5 million for the quarter or 119% more than the $3.9 million in revenues we recognized in 2010. The increase for the quarter is due to increases in our Refined Coal, or RC, segment. RC revenues amounted to $6.1 million for the quarter due to recognition of rental income from our two RC facilities which processed approximately 1.6 million tons of coal for the quarter.

We expect RC revenues to be somewhat less for the second quarter due to planned maintenance outages in April and May at the power plants where the facilities operate, which will reduce the amount of coal available for processing. These facilities were placed into routine operation in the second half of 2010 and so there is not comparable revenue for the first quarter of 2010. We expect these two facilities to continue to generate between $15 million to $20 million in revenue per year through 2019 based on the tax credits produced by their operations. We are currently pursuing the placement of several additional RC facilities as a result of the extension of the placed-in service date that was granted in December, as Mike will discuss further.

Revenues from our Emission Control or EC segment decreased by 34% during the first quarter, as revenues from activated carbon injection, ACI, Systems slowed, matching the power industry's wait-and-see attitude to addressing developing regulations. EC revenues contributed $2 million in the first quarter of 2011, as compared to a contribution of $3.1 million in the first quarter of 2010. The revenue decrease in this segment was somewhat offset by increased consulting revenues we had recognized from several customers who have initiated evaluation studies to determine how best they might respond to the expected regulations.

Revenues from our Carbon Capture, or CC, segment, generated from our DOE and industry supported development and demonstration contracts, decreased 57% to $348,000 for the quarter or -- from the $803,000 in 2010. Work on our new $19 million CO2 capture contract increased throughout the quarter and is expected to provide significant revenues for the Company through 2014. We believe finalization of the recently announced Mercury and Air Toxic Standards, or Air Toxic Rule, and other EPA maximum achievable control technology, or MAC, regulations for the cement industry in industrial boilers will accelerate and further expand our markets, likely starting late this year.

As of March 31st, 2011 we had contracts in progress for work related to our EC segment, totaling approximately $2.6 million and we expect to recognize a significant portion of this revenue in 2011, with the balance to be completed and realized in 2012.

We had DOE contracts, including anticipated industry cost share in progress, totaling $18.5 million as of March 31st, 2011. We expect to recognize approximately $2.1 million from these contracts in 2011 and the balance through 2014.

Our gross margin in the first quarter was 85% as compared to 35% for the first quarter last year. High margins realized in our RC segment, where the majority of the RC facilities operating costs are paid by the lessee prior to our recognition of rental income, created the increase for the period.

General and administrative expenses amounted to $4.8 million in the quarter as compared to $4.6 million in 2010 and include legal fees associated with litigation, which were in excess of $1.9 million for the period as compared to legal expenses of $2.8 million in the first quarter of 2010. We expect non-routine legal costs to decrease significantly starting in the fourth quarter, assuming satisfactory resolution of the Norit arbitration and our related indemnity obligations to ADA Carbon Solutions and Energy Capital Partners by then.

For the first quarter of 2011, we recorded operating income of $1.9 million as compared to an operating loss of $3.6 million in2010,the improvement due, primarily, to our Refined Coal activities.

Below the operating line, we are reporting several items which includes; one, an expense of $39.5 million related to the interim award made by the arbitration panel in the Norit litigation for breech of contract claims and running royalties. Two, payments from NexGen, our JV partner in Clean Coal Solutions, Clean Coal, made to retain their 50% interest in Clean Coal of $374,000 for the quarter. And third, deductions totaling $2 million for the quarter as compared to $1.2 million in 2010, which represents our now approximate 24% interest -- equity interest in the loss of ADA Carbon Solutions, offset by a minor amount of income from our 50% interest in Clean Coal Solution Services, the company we formed with NexGen to operate RC facilities for the lessee.

For the first quarter, our net loss was $27.5 million, or $3.63 per diluted share, as compared to a net loss of $2.8 million or $0.39 per diluted share for 2010.

Cash flow provided by operations was $2.2 million for the quarter compared to cash flow used in operations of $986,000 for the same period in 2010.

As a result of the Norit award made by the arbitration panel in the Norit matter, we recorded liabilities totalling $39.5 million in the first quarter of 2011, with approximately $6.5 million of that amount shown as a current liability based on preliminary estimate of a potential payout scenario.

Our balance sheet as of March 31st, 2010 reports -- 2011 reports cash on hand $9.3 million, working capital $3.2 million, long term liabilities of $65.1 million, shareholders deficit totaling approximately $13.6 million.

Mike will address the Norit matter further and discuss the status and progress on several opportunities we are pursuing. And I would like to turn the call over to him now.

Thank you, Mark. Before providing an update on our current -- our ongoing businesses, let me address shareholder concerns about payment of the $37.9 million interim award to Norit, which greatly exceeds the cash available on our balance sheet. The arbitration panel will be holding additional proceedings later this month and next to determine the timing of the payments due to Norit or if Norit should be awarded any significant legal fees.

Because of the recent success of our Refined Coal business and the potential we have to significantly expand this business in 2011 with additional facilities, we expect we can generate the resources over the next few years to pay our ultimate obligations to Norit Energy Capital Partners while continuing to grow our business. Therefore, it is important that the timing of the payments corresponds with the timing of the cash generated by our business units.

We hope to negotiate acceptable payment terms with Norit and ECP, or that the panel will approve payment terms that would allow us to meet our obligations to Norit. However, if in a worst case scenario, the panel orders to us pay all or a significant portion of the interim award in the near future, and if we were unable to work out acceptable alternative payment terms, we would look to a number of options to delay or postpone these payments until we are in a position to satisfy them.

These options may include seeking protection under Chapter 11 in order to allow the continued operations of our core business, such as Refined Coal, Enhanced Coal, ACI Systems and CO2 capture, and provide the Company with time and means necessary to restructure these debts. Norit and ECP do not have any security interests in these assets.

We hope that we will not have to pursue that option and we would only do so if a filing were in the best interest of the Company and its shareholders. It is the intent of Management and the Board to strongly defend these valuable assets in an effort to preserve shareholders value and allow us to continue to grow our business and generate favorable returns to our investors.

Now, let me focus my discussion on our ongoing businesses. Last week, the proposed Mercury and Air Toxics Rule was published in the Federal Register, starting the 60 day clock on public comment. At a meeting that I attended two weeks ago, Gina McCarthy, the EPA Assistant Administrator for Air and Radiation, stated that EPA felt that the proposed rule was strongly supported by extensive performance data, so that they expected it would withstand legal scrutiny and it be made final by the November 2011 deadline.

The Air Toxics Rule will require over 1,200 existing and new coal-fired electric generating units to reduce emissions of mercury and other hazardous air pollutants, or HAPs. We believe the emission levels proposed for the HAPs will create a significant market for the low Cap Ex technology that ADA provides. The mercury limit of one pound per trillion BTU will require 80% to 90% reduction in mercury from levels in the coal. We are offering three different low-cost technologies capable of achieving these levels of mercury emissions and we also have products that deal with the other two groups of HAPs for which the rule proposes a numerical limit, acid gases and non-mercury metals.

The initial response to the proposed rule by our power-generated customers that we are seeing is an increase in demand for consulting and testing projects. Utilities need to know as soon as possible whether their existing emission control components are sufficient to meet the new limits with the installation of ACI and Dry Sorbent Injection, or DSI, systems. If they need to upgrade their APC equipment with few fab filters or possibly scrubbers, they need to quickly begin the procurement of that large capital equipment.

The next phase of the market generated by this rule will be the purchase of ACI and DSI equipment. ADA has been a market leader in providing nearly one-third of the 150 ACI Systems sold to date to the power industry, to meet mercury limits on new power plants and existing plants in 19 states where regulations are in effect. The Air Toxics Rule could create a demand for up to 500 to 700 new ACI Systems over the next three years, which would be a market of approximately $500 million. We are expanding our sales staff as well as our engineering design group and fabrication collaborators to meet this market.

We believe contracts for ACI Systems will not begin to be awarded until later this year when the rule is made final, but we are already in discussions with some utilities about early fleetwide procurement. These new ACI Systems will likely require 800 million to one billion pounds of activated carbon to capture mercury. ADA provides AC for the industry through its joint venture, ADA Carbon Solution, with Energy Capital Partners.

The AC joint venture has announced that the ruling by the Norit arbitration panel does not impact plans to expand the AC productioncapabilities to meet this market.

ADA maintains a minority interest in the first production plant in Northwest Louisiana and has the rights to a 50% participation in future expansions. Meeting the anticipated increased demand for AC in 2015 will require decisions on new productions, late 2012.

The Air Toxic Rule also requires power plants to reduce emissions of acid gases, thus creating a market for technologies capable of providing trim, 60% to 70% reduction of acid gases, such as HCL and SO3. These systems are expected to cost approximately $2 million to $3 million for an averaged-size plant. For the past year, ADA has been demonstrating DSI equipment for the control of SO2 and SO3 on plants burning bituminous PRB and lignite coals. The DSI approach is also a low-cost solution for utilities for meeting the particulate matter, or PM, standard proposed in the Air Toxics Rule, because dry sorbents can capture condensed flow material that are part of the regulated PM emissions.

ADA also provides options for reducing mercury with coal treatment technologies. CyClean is our patented refined coal technology, provided to Clean Coal Solutions, that has reduced mercury emissions below the proposed limits for plants with cyclone boilers burning PRB coals. CyClean also qualifies for IRS tax credits, presently, of $6.33 per ton.

As Mark stated, we currently have two systems up and operating on four boilers that created over $16 million in revenue during the first three quarters of operation. At this rate, these units, producing over six million tons of refined coal per year, can result in as much as $1 per share in earnings for the Company over the next nine years.

In December, we received a great opportunity when Congress provided an extra year to build and install additional refined coal facilities. We are attempting to take advantage of this opportunity by installing as many new facilities as we can this year. To date, we have committed to building the core equipment for ten new refined coal facilities, each capable of producing one million to five million tons of refined coal per year, with the first units becoming available in June.

We have scheduled to install and test the first five of these units in June, July and August at plants burning over 15 million tons of coal per year. As these demonstrations are completed, contract discussions between the utilities and the financial institutions monetizing the tax credits for us will take place to move the projects toward full-time operation to produce refined coal. On units six through ten, we are well along in discussions with the utilities to put in place contracts to test these units at five other power plants. If we feel there is a market for refined coal beyond these first ten facilities, we will need to make commitments to build additional refined coal facilities over the next several months.

We are financing the construction and installation of refined coal facilities with a $10 million line of credit that the joint venture has established with a commercial bank. In addition, we are negotiating terms with monetizers to provide advanced payment of rent once the facilities are placed in service and become operational. As a reminder, the JV received $9 million in cash for pre-paid rent when the first two systems began operating last summer.

A second ADA coal treatment technology was licensed by Arch Coal last June to modify its PRB coals at the mine, resulting in lower mercury emissions. The licensing agreement provides ADA with a royalty of up to $1 per ton for the premium Arch receives from sales of the enhanced coal.

So far as we have shown that we can enhance PRB coal at the mine and achieve mercury reductions when the coal is burned at power plants. We will be conducting additional testing over the next several months to demonstrate the capabilities of this technology to customers with different plant equipment configurations. These tests will help us define the market for this product that we believe we can produce benefits valued at $2 to $4 per ton of coal to the user. The proposed Air Toxics Rule could create a market for a significant percentage of the greater than 100 million tons per year of PRB coal mined by Arch.

In addition to providing emission control technologies for these new regulations, we continue to develop new technologies for future challenges for the coal-fired power industry. A $19 million Department of Energy program is supporting the development of our [regeneratable] solid service technology to capture carbon dioxide from coal-fired power plants and industrial sources. The project, which is expected to run through 2014, provides funding to scale up the technology to the one megawatt level, a key step in advancing the technology towards commercial process. This contract not only funds the R&D, we expect it to provide significant contributions to ADA's revenues and margins over the next four years.

So in conclusion, the Company is very focused on taking advantage of the near-term prospects for significant revenues that are possible this year with the expansion of our Refined Coal business. At the same time, we are demonstrating the capabilities of our new mercury control technology and adding resources and capabilities to take advantage of the tremendous growth potential over the next three years, as the industry we serve has to comply with the new Air Toxics Rule. Finally, to position ourselves for continued long-term success, we are developing technologies for future regulations.

Before we open up your call for questions, I would like to point out that we are presenting at the FBR Markets Diversified Industrials and Energy Conference later this morning in New York City. We will also be presenting at the Stifel Nicolaus Clean Tech Conference on May 24, also in New York. We hope to see some of you there.

Finally, let me once again state that because the Norit arbitration is a confidential proceeding, we are unable to answer any questions about the hearing at this time. Additional information on timing and other matters will be released when further rulings are made.

Operator, we can now open up the call for questions on our business activities.

Thank you. (Operator Instructions). Our first question comes from Graham Mattison with Lazard Capital Markets. Please state your question.

Hi, good morning, guys.

Good morning.

Good morning.

Let me ask -- on the enhanced coal product with Arch; so you are still testing this by the trainload and you said earlier in the year that you expected to be generating revenues from this later this year. Are you still on track for that? And is there any -- when would we be able to hear more, in terms of when you would have a contract with that?

There is two parts and we are testing it in a variety of ways, some of which is trainload by trainload but there are some other options we can do to expand the opportunity. So we are testing to help define a number of different configurations on how it works. If you remember when we were testing activated carbon on mercury, we tested full scale at over 50 plants, because with mercury, each plant becomes somewhat of a separate animal.

To date, we have conducted tests on the order of six to eight plants. We want to expand that so we know -- better know exactly which type of plants, what type of equipment it works on. So that is going to continue for the next three or four or five months.

In parallel, there is a sales effort going on that would provide this as an option. The market for that is going to be the states that are already regulated mercury enhanced -- to control mercury. So we look at what Arch sells in those states, and that is about 30 million tons of coal going to states with current mercury control regulations. We look at the current market today of being about 30 million tons. And then once the new Air Toxic Rule goes into place, that would expand that market to all of the PRB coals that Arch sells. We hope to be competing and potentially have contracts by the end of this year, in which we start seeing royalties from sales in these regulated states.

Great. So I assume the first six to eight plants where this has been tested, are in those -- in the states with regulations. And those are the plants that Arch is in discussions with on the contracts?

Not necessarily. In some cases, we are choosing plants that are opportunistic, just to get the rights to test at different plants, take some time to get the utilities there. A number of utilities are interested in -- they are looking at options on how are they going to meet the new Air Toxics Rule, so they are also interested in assessing this technology for the future needs. So the tests have not only been with plants within the states that have mercury regulations.

All right. Great. And then if I could just ask is a question on Carbon Solutions. Could you give us an update of where the Red River plant is, in terms of its production capacity and where is utilization right now?

Well, not a lot has changed from past reporting. We expect that this will not be producing at capacity -- still producing at around the 35% capacity level. And that is because the regulations that went away when Care went away and the Pennsylvania State went away, that reduced that market, so we don't see that selling out until 2015. And the -- there are new bidding activity and that relates primarily to new power plants that are coming online that we bid on in the past that are just starting up late this year and next year, as well as contracts -- long-term contracts that were awarded early in the state programs that are coming up for rebid. We don't see a lot of additional sales of activated carbon until the new rules kick in. And we expect to be completely sold out in that late 2014 to 2015 timeframe.

When do you expect the plant to get to EBITDA break even?

Well, probably no change in the report that we expect that to be by year end.

Perfect. All right. I will jump back in queue. Thank you.

Our next question comes from Al Kaschalk with Wedbush Securities. Please state your question.

Good morning, guys.

Good morning, Al.

On the refined coal, it looks like you maybe adjusted the number of targets in the market, in terms of ten units versus 14. Is that more just higher quality potential sales forthcoming that we should read into versus the change in positive sentiment on the market?

Ten versus 14. Could you explain?

I think in the press release you indicated that you prefabricated -- the last press release, in terms of Q4, you prefabricated a number of units to jump start on the market. And I think in the press release, which I don't have in front of me, you indicated that that has moved along, in terms of a certain number.

What we had said earlier is that we originally committed to six units and that we had the capability of building additional units, possibly up to 16 by year end. And then in the last press release, what we said is we committed to another four, so that means we are building right now 10 units. And those 10 units -- we talked about our top ten customers have the potential of earning 30 million tons that we can treat with ten units. And as these first five are coming offline, we have already contracts to install them at specific boilers and they are scheduled for testing in June through August. And that represents 15 million tons for the first five. So that is the first ten units. We can build additional units. And basically, it is a matter of continuing the assembly line building these. And that ends up being about once a month, we have to make a decision to commit for four more units, to keep them moving forward. And so as those decisions are made to build additional units beyond the ten, we will report those on a monthly basis.

Okay. So you have two in place now and five that are increasingly promising.

Well, we have ten that are increasingly promising. And five that are scheduled at specific plants. And what that means -- that means we have been in discussions with them long enough that we have contracts to send our engineers out to design the site specific equipment, prepare their site, get the permitting process going, so that we can schedule these tests this summer. So, I would say all ten of them are promising and five are explicitly scheduled.

Okay, great. And then, Mark, one just housekeeping item and a follow-up. Cash flow from ops, if you could provide that number at some point in time in the call would be great -- in the quarter.

An then I know we don't want to talk about specifics on the award, but on the balance sheet, obviously, you have reported that. Can you talk or help us just appreciate the $33 million that is sitting in long-term, what type of timeframe is that, in terms of the award? What is the pay layout, in term of -- is that five years? Is it a bullet in five years? Is it each $6 million over the next five years? And then secondly, on the current portion, when is that due? Is that the end of the calendar year? Or is it really 12 months from when you reported it?

Al, let me answer the two ones. I did, in my script, report the cash flow by operations -- we generated $2.2 million for the first quarter of 2011. So you will see that on the Q that we will file tomorrow. But I also mentioned that in the call here.

As it relates to the timing of payments that are due under the award; that is a matter that is still being decided by the panel, as we announced before. So those are matters that are under contribution now. We hope to have the final on those items by -- in early July, but those are not known at this time --either the amounts that we would be due this year or in the future. So those are matters that we hope to find out here in the near future.

Okay. Thank you.

Thank you. Our next question comes from Kevin McKenna with Stifel Nicolaus. Please state your question.

Good morning.

Hi, Kevin.

First question. I have two. Does the $2 to $4 in savings on the Arch coal product come from what you have seen? And are there any added values or costs to the utilities disposing of the AC or disposing of their ash?

Well, the $2 to $4, where that comes from, Kevin, is -- it comes from two points. The first is if they have to pay for alternative mercury control and that alternative mercury control is -- their most likely option is activated carbon injection, that is about depending upon their configuration, $1 to $2 per ton of coal. The $1 to $2 per ton of coal relates to whether they have to -- whether they are currently selling their ash for use in concrete.

If they are and they look at an alternative of using activated carbon, they potentially will lose that ash sale and then have to pay for disposal of that ash and that value will vary from site to site, depending upon disposal costs. But that could be another $1 to $2 per ton. So, from what we are seeing we are getting very good results with this that we think it will reduce their mercury control costs by $1 to $2 per ton. And if they are selling -- if they are selling their ash, if they are located in a place where are there is a market for that ash, that could provide an additional value of another $1 to $2.

All right. And second question is, on the five scheduled installations at the specific plants, can you go over a bit of a timeframe with that? What we can expect to see, as far as news flow and getting them in place?

Well, once -- basically, what these are being installed for is a two week test and demonstration to the customer. So, as the first ones come off the line, here at the end of this month, that we will get installed, start the first test in June; that will be a two-week test. Probably, at that point, I don't know if we will be giving a monthly update, but at that point it is placed in service. So it has been created value and could generate upfront payments and it could -- and it has value in it.

So at that point, the utility then makes a decision on whether to move forward with it on a permanent facility. If they don't, we can move that facility and it has ten years of economic life in it, so it is still a win for us. But -- and we believe they are going be moving forward on it. They wouldn't have proceeded this far with us through the test if they weren't convinced this is a good solution for them. And so at that point they'd then begin signing a number of contracts with the monetizer that takes care of them being able to lease the facility at the power plant, to buy and sell coal at the plant. And that could take a month or so, to move it towards a permanent operation.

And the other key part is the permitting. During this two week test, we are operating under a it temporary permit. And before we can start full-time operation, they would have to move to a full-time permanent permit and that could take a couple of months.

So what you will probably see is we will give updates on how many of these units are placed in service. How many we are moving forward with . And so once they are up and operating, that triggers significant payments of the prepaid rent, as well as begin the generation of the tax credits for us. And so that would be an announcable event too. Expect to see some of those move from the placed in service status in the two week test to full-time operation, with some of those starting up in the third -- by the third and fourth quarter.

So, the two key points are that the one year placed-in-service deadline of being at the end of this year, that is only to get them to a point that they have been placed in service. And so we will have time after that to get them monetized. Because once they are placed in service, we have up to ten years to get them fully operational.

Right. And back to the timeline. So if I have this right, it going to be two weeks for the test and the demo, at which point you start working on the final permitting and also the monetizing, and that will take two months.

Yes, potentially. We are already starting on the permitting. It just -- so the permitting may be a four to six months process, but it may have started a month or so ago.

Okay. But -- and those won't be monetized and have contracts in place until you have a final permit I wouldn't imagine, right?

Yes.

Okay. So once they are in place for two weeks, they start generating the cash flow -- the tax credit to the utility. And once the final permit --

No, we won't -- after the two week test, because there is expenses to operate them, unless they are fully monetized, unless we have a permit to continue operation, we will stop the operation. If you remember the first two, we got them placed in service at the end of 2009 -- December of 2009. It then took us until June to get them fully up and operational and monetized. Well, we don't think it will take that long on these, because now we have a monetizer that has a right of first refusal on the next 14 million tons. We have contracts that have been approved that we can use as templates for the next one. But there will be some time period in which, after the two week test is over, we will not be producing refined coal until all of the other contracts and permits are in place.

Okay. Thank you. I will jump back in queue.

Our next question comes from [Steve Kuger] with Foresight Investing. Please state your question.

Good morning. Most of my questions have been answered. Let me just nibble around the outside of this lawsuit. I know you can't talk about the details. But do you have any recourse? Or is the decision and the award from this panel final?

We have a number of options that we are pursuing and we going to pursue all options. We are in negotiations on a number of things and we don't want to go into detail publicly on all the different options.

Legally -- is there in general, can you say anything in general about what options are available in cases like this? Are you allowed to appeal this to -- legally, are you allowed to appeal this to a court?

We are -- we don't think it is in the best interest of shareholders to, again, go through the number of different options that we are looking at.

Okay. Thanks, Mike.

Our next question comes from Brian Shore with Avondale Partners. Please state your question.

Hey, Mike and Mark, thanks for taking my questions. First, on refined coal and following up on one of the previous questions, just for my clarification; when you guys actually put these next five systems in place at the customer's site, that qualifies them as in-service for the tax credit, in theory -- once they are in service at that point, like you said, regardless of how long it takes to negotiate a contract with that customer, they are in service and qualified for the tax credit. Is that right?

Yes, that satisfies the placed-in-service. So you can place them in service at a place that you -- it just gives you a lot of options. So the requirement is to get them up and operational, producing refined coal at some place. And once you have done that, then you -- they have ten years of economic life. They can be moved around. They could be moved to another location. But they've satisfied that placed-in-service.

So as we look at our options, these first ten or so are going to very specific locations where we hope they end up being at a permanent home. But because of the economic potential in these, there is the potential that we may be look at building some of these on spec, knowing that there is additional market out there, but knowing we won't have time to go through all of the contracts to test them at a number of additional sites. But we may take an option of building a number of used units and just operating them at some location to satisfy that placed-in-service with the plan of maybe next year finding permanent homes for them.

That makes sense. And then you kind of touched on this a little bit earlier. But just in theory, you have got these ten and they get built; in theory, how many more could you build by year end?

Well, we stated in the past that we can -- we can build up to 16. We don't think the ability to build these is going to be the limiting factor. So I think we going to be faced with some pretty good options. And as the market response is there, we are going to be looking at what are some of the other practical limitations. The limitation may be how many we feel -- that if we can build and get these up and operational, how many we think we can ultimately sell. So right now, we don't know where that number is. We stated we can build 16 and get those available for installation by late summer, early fall but that may not be the limitation.

Okay. On the legal situation and just trying to get some rough details here. But beyond the $37.9 million and then the royalties, can you kind of talk about what else -- what other items you may have to pay for or be responsible for, whether it is reimbursing legal costs to the JV or whatever? Can you kind of walk us through what else might be behind that?

Brian, the other thing we know about that is, that the panel is considering at this time, is the claim for legal fees. So the parties making submittals this month and next month about those matters. And that is what we expect to hear in the final decision, that as I mentioned, is expected in early July.

Okay. And then my last one, if memory serves, you have got the conditional loan guarantee at the plant. It hasn't been finalized -- like I said, if I'm right, does the lawsuit have any potential impact on whether that conditional loan guarantee moves forward?

Well, it is impacting it in that it won't be addressed until this is all final.

Okay. Great. Thanks for taking my questions.

You're welcome.

(Operator Instructions). Our next question comes from Bruce Dille with JMP Securities. Please state your questions.

Good morning, guys.

Good morning.

The last questions, actually, jus covered what I was looking for on the DOE. But one point of clarification for me, just on the refined coal side as well; when you talk about the definition of placed-in-service, is that on the equipment or is that on the utility?

It is definitely on the facility so that it can be operated. It can produce refined coal at some place other than a power plant. So, it is the facility that produces refined coal is what gets placed in service. And it is that facility that has the economic value that then could be located anywhere over the next ten years to produce refined coal.

Okay. So going back to your comment on the gating factor of limitation, it is not your number of pieces of equipment, because you could take one system and get it essentially placed-in-service at numerous sites, right?

Well, you only have to place it in service once. So the plan would be to get as many different pieces of equipment up and operational this year that satisfy the placed in service.

Okay. Perfect. Thanks, guys.

Thank you. Our next question comes from Veny Aleksandrov with Pritchard Capital Partners. Please state your question.

Good morning.

Good morning, Veny.

Most of my questions got answered. With refined coal, again, and I'm sorry, I was late getting on the call; hypothetically, if you put the systems in place, if the tests run, you have the monetizer, can we see any revenues from these five systems this year?

Well, this is two parts to it, Veny. One is, there is cash flows that we will see this year and those cash flows will be coming in in the form of prepaid rent, once these are placed in service and then fully operational, and we are negotiating those contracts. But in the past, if you remember, we put in two facilities for six million tons and got $9 million prepaid rent. So that is about a $1.50 of prepaid rent. The terms are -- that we are looking at now are more favorable because a lot of risk has been reduced now that we have two units up. So we expect to see some cash flows from these as we get them placed in service.

We hope that several of these will get monetized -- moved from that placed-in-service to full-time operation in the third or fourth quarter of this year. But for example, we mentioned we can build 16 of them. It is unlikely we would get 16 up and operational by year end. But you will see how many we do get up and -- how many get placed in service, so we can estimate future cash flows from these units as they do get placed-in-service. So, you should see some cash flows this summer, as these things start to get placed-in-service and by third, fourth quarter we will start seeing an increase in refined coal revenues over and above the first two systems.

Thank you.

Our next question from Steve Santos with RBC. Please state your question.

Good morning, fellows.

Good morning, Steve.

Just a couple of quick side issues -- you've addressed most of the major questions. Number one, on the refined coal, on the Section 45 tax credits, is there any chance that the geniuses in Washington, DC, as they are trying to cut expenses, would defund any of these programs or the Section 45 allowance? You just never know what they are going to do and I know it is hard to predict politicians. But do you see any risk there?

Well, it has never been done before, that once something like this has been put out -- that is part of the answer. Another part is, I think with what we have seen in Washington, if you're put in a situation where a takes them passing a law as opposed to not doing anything, it is difficult for them to pass anything. So we are in good shape that what we need from them was passed, and therefore, it would take something proactive for them to do that would take that away, so that reduces that likelihood.

And second of all, this is a rule that has been affirmed by Congress three times. It was affirmed in 2004, when they passed the bill. They affirmed it again in 2008, when they modified the rule and gave an extension to the end of 2009. And then they affirmed it again in this past December. So, they have already voted for this three times. We are not seeing any discussions of trying to take this away.

Okay, good. Just one other issue. Several quarters ago, you had made comments indicating that -- of course, it was actually a couple of years ago, that the Norit suit had been filed in Georgia because -- at least one of the reasons was because legal fees are not recoverable in Georgia. And I'm wondering how much of these potential legal adjustments that you may be addressing would be going to the Norit legal team? Or is it all on -- with the joint venture and your own legal team?

Well, it is both. And we will find out those answers over the next couple of months.

They don't do anything fast, do they?

No.

Okay. Thanks, guys.

Our next question comes from Ben Kallo with Robrt W. Baird. Please state your question.

Hi, Mike and Mark, how are you?

Good morning, Ben.

Two quick questions. First, I wanted to clarify -- this year you are not altering production at all because of the lawsuit at the plant. Is that correct?

Not alternating production?

You are not changing your production level for any reason right now?

No.

Okay. And then secondly, as you look ahead, and maybe put the cart before the horse here, but on line two, is that completely out of the entity that line one is in, so it is protected against any of the lawsuit there then? What kind of changes would you have to make? Have you actually gotten that far, in the overall process, where you would susceptible to the same type of case for Norit? And how does that change your CapEx as you look out there? Maybe that's -- maybe you haven't got to that point yet.

The simplest answer is as ACS has looked that this ruling and their plans, they see it as providing no limitation as on future plans.

Okay. Great. Thank you.

Our next question comes from [David Helms]. Please state your question.

Good morning.

Good morning.

Once this activated carbon is loaded with mercury, is there a chance at the disposal site that that mercury can leach out on its own?

No, and that has been proven over and over again, that once the mercury is captured in the activated carbon, unless you heat it up to several hundred degrees, you can't get it out of there. So it is totally nonleachable.

Thank you.

Our next question comes from Kevin McKenna with Stifel Nicolaus. Please state your question.

Just a follow-up. Additional benefits of refined coal, specifically, for the first units placed, they were in a state without advanced mercury regulations. Are there any additional benefit there? And secondly, is there an ability to burn a less expensive coal when contracts come due -- with the refined coal?

Two parts of that. The benefits are that the utility is seeing -- getting the benefits of the mercury control essentially for free, so again, that is $1 to $2 a ton of benefits. Second of all, in the arrangement between the monetizer and the utility, the utility gets to share in the benefit of the tax credit. So there is an economic benefit. And so this ends up being one of the drivers that we are seeing that is leading to a lot of success of accepting this. Because if you look at two utilities operating in an unregulated state, such as Illinois, where a lot of our customers exist, if every other similar plant has this technology, that provides them a pretty significant economic advantage. So it kind of pushes them to also accept this, or they are operating at an economic disadvantage.

Even in a regulated state, that is something of a driver for this, because if your PUC is seeing that everybody around you with a similar plant is taking advantage of something that lowers cost and you are not, that puts some pressure. The success of this project is leading to greater success, just because it is creating, in this region -- that we think most of the plants of the design that this applies to, the cyclones or the PRB coals, will -- a large majority of them will end up with this technology.

The second part relates to some of the other benefits we are seeing and we are constantly improving the technology. And we think they are -- that plants are seeing some improvements in combustion and that will result in some potential flexibility. As they go out for contracts -- future contracts on coal that could be beneficial to the plant also.

Thank you.

Thank you. Our final question comes from [Robert Lattermill]. Please state your question.

Yes, I have heard a lot about other subjects but not very much about the dry sorbent injection systems. Can you describe them a little more?

Well, they are similar to the activated carbon injection system, in which you are injecting a solid powdered material into the gas stream. So with the ACI systems, we are injecting carbon and that carbon reaction to mercury. On the dry sorbent injection systems, these systems are designed to inject an alkaline material, either a sodium or calcium based material, to react with one of the acid gases, SO3, HCL, potentially SO2.

So we are providing these because it gives us a broader breadth of offering to our customers. So if we can satisfy, for utilities, their need to control mercury as well as the gas acids and particular PM control with additional equipment, they can get most of their -- we can help them meet all of these new regulations. So it just expands the breadth of offering that we can provide to our customers.

Can you estimate a market improvement amount that this might represent?

Well, as I mentioned, these things cost about $2 million to $3 million per plant. And EPA estimates there will be a market for about 200 of these. It is a $400 million to $500 million market for the equipment. And on this case, we will not be producing the chemical. The chemical will be provided by the lime suppliers or the sodium or trona companies.

Thank you.

Well, that concludes our earnings call today. I thank everyone for joining us and your continued interest and investment in ADA.

Thank you. Ladies and gentlemen, this concludes today's conference. All parties may disconnect. Have a great day.